Economist Koen Schoors: ‘I expect even more companies to run into problems in the coming months’

The Belgian economy grew by 0.3 percent in the past quarter. At the same time, unemployment has also increased due to more bankruptcies and temporary unemployment, in Flanders even by 12.4 percent. These seem to be two contradictory trends. How is that possible?

“For this we have to go back to the energy crisis at the end of 2022: the energy inflation was incorrectly calculated because only price increases were taken into account for variable contracts, while most people then had a permanent contract. The consequence of this overestimation is that too much indexation has been implemented and wages have risen too sharply. And that in turn has affected our competitive position compared to abroad. We had lower industrial activity and we feel that now: companies are having a harder time and unemployment is rising. Van Hool is a good example of this. The bus company’s bankruptcy is certainly due to poor management, but when competitiveness decreases, it is the weakest who fall off the cliff first.”

There is also social unrest at ExxonMobil in Diegem because its headquarters are moving to London. Are we in for a hot summer with even more major bankruptcies or job losses?

“I expect even more companies to run into problems in the coming months. But the reports are always a bit behind the times: industrial activity has now rebounded, so I think that the rising unemployment will soon fall again. The job losses are a temporary blip and I think we are close to the peak.”

Six months ago you said that the economy was doing well because we were spending a lot of money: we still had some money left over from the corona years, when we spent little, and thanks to indexation our purchasing power remained at the same level. Has that money run out in the meantime?

“There isn’t much left anyway. Our purchasing power has not fallen, but the increase has slowed down because real inflation is somewhat higher than the indexation indicates. It is likely that people on low incomes will now feel this more than the higher wages.”

Speaking of inflation: this week also saw the news that the central index has been exceeded again, causing benefits, pensions and civil servant wages to rise. Is inflation more persistent than expected?

“I do see a few problems with the inflation figures. To start with, we don’t calculate them correctly and everyone knows that. For example, for energy we assume that everyone has a variable contract, which is not the case at all. However, it is not that difficult to obtain accurate figures: you request the actual payments from the energy regulator. In the Netherlands they used to do the figures based on unrealistic prices, but suddenly they found themselves with an inflation of 17 percent, a completely arbitrary figure.

“An important difference is: the Netherlands does not have automatic indexation, but we do. I am not against the index per se, but if you base it on incorrectly calculated inflation, you get noise. If wages rise too quickly, we lose competitiveness and therefore jobs, and if they rise too little relative to real price increases, people get angry. Both scenarios are annoying.”

Why isn’t that mistake corrected?

“Because indexation is politically sensitive. One party wants to abolish them, the other does not want to change anything. While it is actually a technical problem that can be easily solved, without having to open Pandora’s box.”

What’s still wrong with inflation?

“We in Europe are so fixated on low inflation – which should not exceed 2 percent per year – but that is a fetish. I think we should think about a slightly higher upper limit, such as 3 or 4 percent per year. For example, higher inflation would solve the problem of low wages for young workers.”

You’ll have to explain that.

“If you look at current demographic developments, you see that the number of elderly people is increasing – that is not a problem – while the number of young people is decreasing – that is a problem. After all, the number of workers is becoming scarcer and therefore more expensive. The whole idea of ​​seniority, where you start working on a low wage and earn more and more, does not make any sense at all when you look at the current market offer. So something will have to change there, but how do we do that? We could choose to pay the young people a little more and the older people a little less, but that seems politically unrealistic to me, people will not accept a reduction in wages.

“The only way to close the relative differences between old and young employees is to only increase the wages of young people. For that we need a bit of inflation and 2 percent is too little, I think. There are still arguments for slightly more inflation, such as the green transition. If you are faced with large investments, higher inflation will allow the debts to evaporate somewhat.”

We are facing elections, the chance of a long government formation is real. Does that threaten to damage our economy?

“It depends. A caretaker government does not make any new expenditures and that is sometimes a good thing. For example, the federal government was far too generous during the energy crisis, against all advice. A quarter of people indeed had more expensive energy costs, but half of Belgians actually received a lower bill as a result of these interventions. But the government felt rushed by the panic reports in the media and pushed the budget even further into the red.

“On the other hand, history shows that things can happen quickly. We were stuck in protracted negotiations when Dexia threatened to collapse, the consequences would have been dramatic. A week later there was suddenly a government. Same story during corona. When the need is great, the government is close at hand.”

Let’s zoom out a little further. Europe also released growth figures for the past quarter this week, which are lower than expected. Economic growth of 0.8 percent is expected for 2024 as a whole. This is considerably less than predictions for the United States (2.7 percent) and even Russia (2.6 percent), which is nevertheless subject to economic sanctions. Is Europe doing so much worse?

“Europe is not doing great, but we must say that we have managed to avoid a recession, despite the corona, energy and inflation crises. America is indeed growing faster thanks to cheap energy and innovation, but it is also a doped-up economy. The government invests very heavily and takes a protectionist position: they subsidize priority sectors on the condition that they come to America. The country therefore has a very high national debt, more than 120 percent of gross domestic product. That is much more than Belgium, and we are already one of the worst countries in Europe in that respect. America does stimulate its own economy, but it also leads to inflation.

“Russian growth is a bubble: there the economy is driven by the war. The Russian government spends a lot of money on its own arms industry, thereby creating employment and more people consuming. Rapid growth is typical of countries with such a war economy, but that does not last: all that money flows to things that by definition break, such as bombs, tanks and bullets. Moreover, the missing money is not invested in other, civil matters. I expect that within two or three years the Russian reserves will run out without anything to take their place. Russia’s gross domestic product is already declining. On the surface, the economy is in good shape, but it is a war bubble.”

Here too, we hear more and more that Europe must switch to a war economy. What would that mean for us?

“A classic war economy means that war objectives take priority over civilian objectives: the car factory will make tanks, the textile factory will make army uniforms instead of T-shirts and the metal factory will make weapons. That is not an issue in Europe. However, governments will have to spend a larger share of their gross domestic product – at least 2 percent – ​​on defense. By comparison: in Russia this is now about 6 to 8 percent, although no one can say that with certainty. These are amounts reminiscent of the times of the Soviet Union.”

More money for defense on top of a green transition: how are we going to pay for that?

“What strikes me is that everyone always talks about the costs of the green transition. I don’t think that is correct: solar panels or wind farms are not costs but investments that – if done right – we will reap the benefits later. We are already draining hundreds of billions every year to gas and oil companies in countries with dubious reputations. If we can reverse that, it will be a triple win: we will save money, emit less carbon and give autocratic regimes less financial power. Those investments will pay for themselves.

“This is somewhat different in defense, in the sense that the green transition is supported by the government, companies and citizens, while families and companies of course do not buy weapons or pay wages to soldiers. That money must come from the budget. On the other hand, increased defense production will also provide more employment and therefore prosperity, although this will not reach Russian proportions. We are not going to build army planes or tanks ourselves, we will have to import them from, say, Germany. These investments in defense will therefore have a positive effect on the European economy. And if we don’t do that, we will pay the price in another way.”

The geopolitical future will therefore be decisive. Can anything meaningful be said about the economic consequences of a possible Russian victory in Ukraine?

“Hardly. I think we can hardly afford for Russia to win. Moreover, every war ends in negotiations. We will have to wait and see what this will bring in the future, but what should happen to the Ukraine that is still free? We will have to draw up a Marshall Plan to rebuild the country, as the Americans did for Europe after the Second World War. Another expensive expense, you say? Not at all, on the contrary. Thanks to the Marshall Plan, Europe experienced golden times after the war, something the Americans have not regretted. (laughs) Such expenses are not costs, but investments.”